This paper attempts to investigate the possibilities and limitations of implementing ABC in universities. More specifically the study makes use of the case study method to illustrate the implementation of activity-based costing of library services in a private university in the Kingdom of Bahrain. The research methodology of the case study is a combination of both descriptive and quantitative analyses.

Whichever approach you prefer, it’s important not to be overly sensitive to small errors. The objective is to be approximately right, say within 5% to 10% of the actual number, rather than precise. If the estimate of practical capacity is grossly in error, the process of running the time-driven ABC system will reveal the error over time. Activities consume overhead resources and are considered cost objects. Traditional costing method is easy to implement as a single cost driver is set for all activities and overheads are simply divided into fixed and variable overheads.

Kami Export – Kayla Macias1 – The Classical Pattern of Persuasion Activity 5.pdf

CIMA, the Chartered Institute of Management Accountants, defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.

Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. Activity-based costing is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. Traditional costing, on the other hand, is a costing method that involves allocating overhead costs on a single, volume-based cost driver. This single cost driver could be based on several aspects such as the number of labor hours, machine hours, etc. Sometimes this happens when production uses more hands-on labour than machine labour.

Pros And Cons Of Activity-Based Costing:

Finally, Traditional Costing Vs Abc alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation, utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products. The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. Activity-based costing is preferred by a lot of businesses due to it being more accurate. However, it’s quite difficult to implement, not to mention it’s costly as well. As such, activity-based costing is more suitable for businesses that have high overhead costs, specifically businesses that manufacture products instead of offering services.